Apple's iPhone could be last standing in smartphone 'race to the bottom'

Google's Android and Microsoft's Windows Phone 7 will compete for presence on handsets in a smartphone market "race to the bottom," one that could leave Apple's iPhone as the "last man standing," one prominent Wall Street analyst believes.

Charlie Wolf with Needham & Company issued a note to investors Friday in which he declared the "successful launch" of Windows Phone 7, the new mobile operating system from Microsoft. He expects Microsoft and Google to compete aggressively among the leading smartphone manufacturers, including HTC, Samsung, Motorola, LG and Sony Ericsson.

"In the short run, the turf war could put the smartphone manufacturers in the driver's seat," Wolf wrote. "Ultimately, however, commoditization, accompanied by deteriorating prices and gross margins, appears inevitable for licensees of the Android and Windows Phone 7 operating systems.

"With its growing brand equity, the iPhone could end up as the last man standing in this race to the bottom."

Wolf doesn't expect that much will change during the December quarter in terms of market share. But he believes the ramp of Windows Phone 7 in early 2011, along with the anticipated launch of the iPhone on the Verizon network, could result in a very different landscape come March.

Wolf noted that the Windows Phone Facebook app had just 135,000 active users as of Nov. 30, which could be an indication of how many handsets Microsoft has sold. While those sales are nowhere near the record sales pace of Apple's iPhone, Wolf believes Microsoft's company-wide $500 million marketing budget will play a major factor.

"We suspect the company will devote a material portion of it to buy the support of the leading smartphone manufacturers," Wolf wrote. "Indeed, if Windows Phone 7 is successful, it's difficult not to conclude that the Android platform will be impacted more than any other operating system because of the similarity of the two licensing models."

And if the iPhone does launch on the Verizon network in early 2011 as expected, Wolf believes that Android will suffer the most.

"Android benefitted from the absence of the iPhone on the Verizon network, because the carrier spent heavily to promote the platform as an alternative to the iPhone," he said. "Android effectively moved into a vacuum created by the implosion of Windows Mobile."

That means Apple would have to take a loss enough to make it unprofitable for Android devices to compete.

Google could start tapping their immense advertising revenue, much like Microsoft taps it's software revenue to compete the X-box against Sony's PS3 (which itself is being tapped by their entertainment arm)

No, Apple has no alternate revenue stream to compete. They will accept a minority share of the market and Android will rule the majority. Microsoft has already lost being so dam late to the game.

By then Apple will off making the next great thing anyway. Smart wrist watches. Opps..

I think you missed the point. As the other vendors sell 100s of different units and try to recover their investment with 1% of the market share for each new device, Apple's model of one (ok, really 3) SKUs for the iPhone means that their development effort is amortized over a much larger base AND their unit production costs are reduced based on the tremendous volume they have.

That means Apple would have to take a loss enough to make it unprofitable for Android devices to compete.

Google could start tapping their immense advertising revenue, much like Microsoft taps it's software revenue to compete the X-box against Sony's PS3 (which itself is being tapped by their entertainment arm)

No, Apple has no alternate revenue stream to compete. They will accept a minority share of the market and Android will rule the majority. Microsoft has already lost being so dam late to the game.

By then Apple will off making the next great thing anyway. Smart wrist watches. Opps..

This is a pretty irrational comment, totally at odds with reality. So, Google is going to start subsidizing handset manufacturers, long-term, to make Android financially viable? Totally at odds with their business model, and not really a viable strategy for them over the long haul. No other revenue streams at Apple? Maybe you haven't heard of the Mac? The iPod? Plus, what do they need with other revenue streams, iOS is and will remain the the cash cow of mobile. And, of course, the main point of the article: Apple doesn't need to take a loss to make it unprofitable for others to compete, it already is that way, the situation the article is based on.

This guy is dumb. Even though Microsoft has a giant marketing budget in place, that doesn't mean consumers are going to buy. People want quality. The iPhone provides that.

By the way, I can't help but to laugh every time I see a Windows phone commercial because they don't actually show any of the features. The just show the home screen! The hardware! What a horrible way to advertise, in my opinion.

That means Apple would have to take a loss enough to make it unprofitable for Android devices to compete.

...

My reading of the article is that the "Race to the Bottom" is between Microsoft Windows Phone 7 and Google Android. The iPhone would be the last man standing because the competition will have run themselves out of business.

Fast forward to this time next year when the margins and average selling prices for both Windows and Android phones will still be pitiful compared to iPhones. Wolf has the competitive landscape nailed.

My reading of the article is that the "Race to the Bottom" is between Microsoft Windows Phone 7 and Google Android. The iPhone would be the last man standing because the competition will have run themselves out of business.

my understanding was they were looking at Apple as the "hardware manufacturer" and not as the "software provider" (even though they are both). It's identical to the PC market - Apple makes the hardware AND the software, and thus enjoys fat margins while HP, Dell, and the rest enjoy huge volume but pathetic margins. The same will happen in mobile. Android will most likely become the most prevalent mobile OS, but the hardware partners will suffer. That is what this article is talking about.

That means Apple would have to take a loss enough to make it unprofitable for Android devices to compete.

Google could start tapping their immense advertising revenue, much like Microsoft taps it's software revenue to compete the X-box against Sony's PS3 (which itself is being tapped by their entertainment arm)

No, Apple has no alternate revenue stream to compete. They will accept a minority share of the market and Android will rule the majority. Microsoft has already lost being so dam late to the game.

By then Apple will off making the next great thing anyway. Smart wrist watches. Opps..

That means Apple would have to take a loss enough to make it unprofitable for Android devices to compete.

I will pile on and say that you totally misunderstood the article or are unaware of the distribution of industry profits in the personal computer market. Apple doesn't have to take a loss to remain the last man standing. They have never had to deploy such a strategy and never will. Jobs would rather exit the market than do an XBox billions-down-the-toilet play.

The article is saying that Windows Phone and Android hardware manufacturers will compete fiercely against each other driving down their margins to near zero while Apple goes merrily along with fat margins due to a. economies of scale and b. iPhone buyers don't consider Android and WinPho as equal-price substitutes. Which is basically what's going on in the Mac v. Windows race right now. Windows outsells Macs but the lion's share of industry profits go to Apple. In fact it's already going on in the smart phone market even before WinPho's release; the competition among the Android mfrs alone is already very intense. It'll just get worse as WinPho gets (or tries to get) deeper penetration.

So Apple will be the last man standing in the smart phone business in terms of profitability, not necessarily in unit sales. Although they already are the largest single smart phone hardware seller and I expect they'll stay that way. (Nokia's old gen smart phones don't count.)